REPORT SAYS SUPPLY OF LOW SULPHUR FUEL IS UNCERTAIN IN 2020

A new report from IHS Markit concludes that the refining and shipping industries are ill-prepared for the massive change in fuel regulation set to go into effect from the beginning of 2020. The resulting market impacts will be major, costly and far-reaching.

Collectively, says the report, ships burn more than 3 million barrels a day of residual fuel oil. IHS Markit expects the majority of the demand for high-sulphur residual fuel oil will switch to demand for new lower sulphur fuel in 2020.

The report, titled Navigating Choppy Waters: Marine Bunker Fuel in a Low-Sulfur, Low-Carbon World, says that compliance remains the greatest uncertainty and there is concern whether sufficient supplies of compliant fuels will be available in ports. The result will be higher freight costs for most cargoes, and ultimately, those costs will be passed to consumers.

“Shippers will face significant compliance costs to either upgrade equipment or switch to more expensive, cleaner fuels,” said Spencer Welch executive director, oil, midstream and downstream for Europe, CIS and Africa at IHS Markit, and manager of the study. “Refiners – and fuel buyers – will experience significant price impacts as they shift production to deliver greater volumes of very low-sulphur fuel oil (VLSFO) and find a market for their less valuable fuels.”

“The rapid pace of implementation of this new regulation is making it very challenging for the refining and shipping industries to respond,” said Sandeep Sayal, VP of downstream research at IHS Markit.

IHS Markit researchers expect on-board ship scrubbers will be the primary compliance path for larger ships which could continue to burn cheaper, fuels. However, until those scrubbers can be installed—which for numerous ships will not happen before the IMO January 2020 deadline - many ships will have to burn more expensive VLSFO fuels.

“We estimate between 5,000 and 10,000 ships will undergo scrubber installation at a cost of between US$2 million and US$7 million each, plus increased operations costs,” said Krispen Atkinson, senior consultant, IHS Markit maritime & trade research. “To date, the industry has spent or committed more than $6.6 billion to fit more than 2,000 ships with scrubbers.”

Refiners will produce more distillates as new demand arises, with about half of the new compliant fuel coming from non-distillate sources within the refinery, but the remaining 50% will need to be sourced from refinery distillates. However, these same distillates are needed for other growing diesel markets. As a result, refiners will likely have to make significant operational changes and ultimately invest billions, increasing costs and distillate prices (relative to crude oil prices).

“Highly complex refineries, which have the flexibility to convert various grades of crude oil into a wide range of refined products to meet market demand, will benefit most from the IMO-specification change,” Welch said.